Updated: Sep 20, 2021
Contracts are an essential part of doing business, especially for those in procurement, but they can also be tricky to navigate. They often come with complex legal jargon and many clauses that may not seem relevant to you as a buyer. But contracts can help you by providing protection for your company and making sure the vendor holds up their end of the bargain. By understanding how contracts work, you'll be able to take advantage of them in ways that will benefit your company today and down the road.
In this blog post, we will discuss how to use contracts to your advantage. We'll also talk about how you should approach negotiations with suppliers and what types of clauses you may want to include in your contract.
Read on for some tips on how to use contracts more effectively....
Relying on the legal department to ‘own’ the contract terms is the biggest disservice to your results and career
We must remember that buyers are traditionally afraid of contracts and are happy to negotiate the price and leave the contract terms to the legal department during the final stages of the process. This is, however, where suppliers take the lead as once an agreement has been reached with your supplier on price, they immediately have the upper hand when it comes to the rest of the negotiation process. As a buyer, this is a huge mistake and it can be easily avoided by following a simple process. When you adopt this process at the start of our negotiations you can essentially eliminate the common problem of a supplier making modifications to your contract, effectively writing their own terms:
Give the supplier the T’s and C’s upfront with the RFQ and RFP. This simply sets the expectations right from the beginning of our negotiations and will save any potential misunderstandings later on in the process.
Send out a supplier selection grading matrix. This is the document outlining and communicating to your prospective suppliers the criteria you are going to be using to make your decision on which supplier to use. You may include several categories eg. cost, quality, safety, etc. The supplier responses to these criteria will then be graded to enable you to make your selection.
Insert a final category in the documents entitled ‘Number of supplier-requested changes to buyers contract’. Ensure it is given a big number in the weighting factor category to make it clear that you consider this a vitally important factor in your decision-making. The impact of making this one small but critical insertion is huge as it causes the prospective supplier to think twice about requesting modifications to the terms or indeed wanting to delete certain terms altogether. This one seemingly simple step ensures that the deal remains on your terms rather than that of the supplier.
Empowering yourself with contract knowledge can liberate you from being dependent on the legal department
Once the contract is in the hands of the legal department without the supplier modification requests being kept to an absolute minimum, the time to reach a point of satisfactory conclusion for both parties can be extremely long. The legal department is not revenue-generating and therefore the lawyers are always fewer in number than necessary for the number of contracts needing attention. By having a good knowledge of contracts and how they work, you can reduce the time taken to do the deal, easily prevent and remedy any TCO excursions and ensure that as buyers you have the right protections.
Relying on standard contract template terms can get you in trouble. Here’s how to stay out of it...
While this is, unfortunately, a common pitfall for many buyers, a lot of issues can be avoided further down the line by examining each clause of the standard contract to ensure it applies to your circumstances and the specific deal under negotiation. There may also be many things missing from a standard contract that need to be included to mitigate any potential future problems and again, the solution is a simple one.
The most efficient way to tackle this is to sit down with the internal customer and engage in a thorough question and answer process. You must ask, not only what could go wrong today, but what could happen tomorrow; What are the things that could go wrong with the supplier after we sign the contract that is going to cause a problem to the business? List every single thing you can think of. Every potential problem that may arise. Everything you may have seen happen before, whether to you or your peers. These things are all predictable excursions and the exact things that we should be able to avoid.
After having this conversation you can then take that list and reverse engineer each separate concern into a custom supplier performance clause within the contract.
Once you have these custom clauses added, you can then state that failure to adhere is either a material breach of contract or a minor breach of contract. Remedies for any breaches should also be stipulated up front in the contract including clear time frames and who pays for costs.
A little more time is spent upfront, ensuring the contract addresses everything it needs to is essential. By taking these additional steps you will attract the supplier's attention and they will be undeniably aware of your expectations and be able to align with them accordingly. When you include your expectations in the contract it is much clearer for both parties to understand what’s important right from the outset.
Your contract should be a safety net but it can be so much more!
When you compare a contract to the safety net of parachuting, it’s not hard to see why people are so reluctant. The idea that if things go wrong there is someone else who will take care of them can be very comforting for an individual or company new to business dealings. But just like any form of protection - your parachute doesn't do anything unless you make sure it's packed and ready before jumping out of the plane.
With good contract management and by investing the time to write and negotiate contracts well, you can make the shift from the contract being a safety net in case things go wrong to using it as a strategic tool for your advantage; You can free up the time that you may ordinarily spend on fire-fighting tactics and be able to focus on what should be the core activities of a purchasing department such as more innovative strategy, more negotiations and better total cost opportunities for your business.
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